Saturday, December 31, 2011

Leasing Through the Back Door: The Private Financing of “Public” Prisons | NationofChange

Leasing Through the Back Door: The Private Financing of “Public” Prisons | NationofChange

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Published: Saturday 31 December 2011
“AB900 allows the California Department of Corrections and Rehabilitation (CDCR) to authorize $7.8 billion in lease-revenue bonds to fund the addition of 53,000 new prison and jail beds while bypassing the electorate.”

Nearly 130,000 bod­ies are cur­rently caged in for-profit or pri­vately man­aged “cor­rec­tional” fa­cil­i­ties in the United States, a fig­ure that ac­counts for 16.4% of fed­eral and 6.8% of state pop­u­la­tions.

Since 2000, more­over, the num­ber of ex­tant for-profit and pri­vately con­tracted penal in­sti­tu­tions has sky­rock­eted by ap­prox­i­mately 120% dur­ing a time in which the pop­u­la­tion of “pub­lic” fed­eral and state fa­cil­i­ties has grown four times as slowly. And al­though fed­eral and state ex­pen­di­tures on pris­ons have mush­roomed by72% over the last decade and now cost tax­pay­ers $74 bil­lion per annum, the two largest pri­vate prison com­pa­nies, Cor­rec­tions Cor­po­ra­tion of Amer­ica and GEO Group (for­merly Wack­en­hut Cor­rec­tions Cor­po­ra­tion), have to­gether “earned” over $2.9 bil­lion in prof­its since 2000.

While in re­cent years much pub­lic at­ten­tion has rightly been de­voted to il­lu­mi­nat­ing the “in­dus­trial” op­er­a­tions as­so­ci­ated with the pro­lif­er­a­tion of pri­vate prison fa­cil­i­ties—from the tumesced pock­et­books of pri­vate prison op­er­a­tors to the prof­its gen­er­ated by telecom­mu­ni­ca­tions com­pa­nies by way of no-bid phone con­tracts—sur­pris­ingly scant at­ten­tion has been paid to the pri­vate fi­nanciers of “pub­lic” prison pro­jects who earn a profit each time a prison is built. And un­like those who col­lect rev­enue on prison op­er­a­tions, firms that pur­chase bonds for prison con­struc­tion needn’t have a per­sonal stake in the even­tual util­ity or sol­vency of any given fa­cil­ity. Their cof­fers will grow whether or not prison beds are oc­cu­pied.

But a two-decade long de­clen­sion in pub­lic sup­port for prison ex­pan­sion has thwarted tra­di­tional op­tions for fi­nanc­ing new prison con­struc­tion and has re­sulted (as it usu­ally does) in new op­por­tu­ni­ties for cadres of in­vest­ment bankers, build­ing con­trac­tors, and con­sul­tants to re­al­ize in­dul­gent re­turns-on-in­vest­ment with abid­ingly anti-de­mo­c­ra­tic fi­nanc­ing schemes. I call it “leas­ing through the back-door.”

Even a cur­sory re­view of prison, jail, and de­ten­tion ex­pan­sion ini­tia­tives demon­strates that fed­eral, state, and mu­nic­i­pal gov­ern­ments are using “back door” fi­nanc­ing in­stru­ments that allow them to bor­row bil­lions of dol­lars to build fa­cil­i­ties that the pub­lic does not want nor can af­ford. The State of Cal­i­for­nia pro­vides a su­perla­tive case study for the ex­am­i­na­tion of “back door” prison fi­nanc­ing.

Sim­ply stated, Cal­i­for­nia vot­ers have over­whelm­ingly re­jected the is­suance of prison con­struc­tion bonds the last two times the issue went to ref­er­en­dum. And ac­cord­ing to a 2011 poll jointly com­mis­sioned by the Uni­ver­sity of South­ern Cal­i­for­nia and Los An­ge­les Times, nearly three-out-of-four Cal­i­for­nia vot­ers cur­rently op­pose tax in­creases for the pur­pose of build­ing new pris­ons. Per­haps the re­cent voter dis­in­cli­na­tion for prison con­struc­tion is a re­sult of the pas­sage of Cal­i­for­nia’s AB900 in 2007. AB900 al­lows the Cal­i­for­nia De­part­ment of Cor­rec­tions and Re­ha­bil­i­ta­tion (CDCR) to au­tho­rize $7.8 bil­lion in lease-rev­enue bonds to fund the ad­di­tion of 53,000 new prison and jail beds while by­pass­ing the elec­torate. To date, the CDCR has pack­aged and sold $2.1 bil­lion in lease-rev­enue bonds. Ap­prox­i­mately $900 mil­lion of that debt was sold in 2011 alone.

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Many anti-prison ac­tivists have co­gently ar­gued that AB900 was drafted to cir­cum­vent the “will of the peo­ple” who pre­vi­ously de­feated two propo­si­tions placed on the bal­lot by the state leg­is­la­ture to ap­pro­pri­ate money from gen­eral oblig­a­tion bonds to pay for more pris­ons. When vot­ers began re­ject­ing gen­eral oblig­a­tion bonds for prison con­struc­tion, state trea­sur­ers, cor­po­rate lawyers, and in­vest­ment bankers began un­der­writ­ing lease-rev­enue bonds for the pur­pose of avoid­ing con­sti­tu­tional and statu­tory re­stric­tions on such debt guarded by voter ap­proved bonds.

Of course, prison fi­nance pol­icy is far from im­mutable and often re­flects po­lit­i­cal-eco­nomic trends, ex­i­gen­cies, and anx­i­eties. In fact, prior to the mid-1980s, pris­ons were gen­er­ally fi­nanced in one of two ways. State of­fi­cials ei­ther adopted a “pay-as-you-go” ap­proach by fund­ing new con­struc­tion out of gen­eral rev­enues or they bor­rowed money through the sale of gen­eral oblig­a­tion bonds. A gen­eral oblig­a­tion bond is sim­ply a re­pay­ment pledge that is guar­an­teed by the “full faith and credit” – in­clud­ing the tax­ing power – of the is­suer, in this case, the state. Fail­ure to pay debt ser­vice on a gen­eral oblig­a­tion is ex­ceed­ingly rare among large gov­ern­ment en­ti­ties and typ­i­cally only oc­curs under con­di­tions of bank­ruptcy. Most cru­cially, the is­suance of gen­eral oblig­a­tion bonds re­quires ap­proval by tax­pay­ers in the form of a bond ref­er­en­dum.

As cor­rec­tional pop­u­la­tions and costs mounted in the 1980s and 1990s, how­ever, Cal­i­for­nia and other states found it in­creas­ingly dif­fi­cult 1) to fund prison ex­pan­sion vis-à-vis an­nual op­er­at­ing bud­gets and 2) to se­cure pub­lic ap­proval for new debt. Through the col­lu­sion of the pub­lic and pri­vate sec­tors (scarcely dis­tin­guish­able these days…) state of­fi­cials re­sponded by is­su­ing an­other type of debt to fi­nance prison con­struc­tion: lease rev­enue bonds. Elected of­fi­cials can cir­cum­vent cit­i­zen lead so­cio-po­lit­i­cal ob­sta­cles by is­su­ing lease-rev­enue bonds, a type of debt that al­lows agen­cies cre­ated by the gov­ern­ment to fi­nance a prison fa­cil­ity by is­su­ing tax-ex­empt bonds and then leas­ing the right to use the fa­cil­ity back to the state. The state, which gen­er­ally gains own­er­ship of the pro­ject at the end of the lease pe­riod, uses funds ap­pro­pri­ated by the leg­is­la­ture (and the gov­er­nor, typ­i­cally) to make lease pay­ments. Lease-rev­enue bonds do not re­quire voter ap­proval.

Lease-rev­enue bonds are often ex­tra­or­di­nar­ily costly be­cause they carry high in­ter­est rates re­sult­ing from the lease agree­ment that guar­an­tees the loan. Even by the CDCR’s own ad­mis­sion, “from a stand­point of costs alone, gen­eral oblig­a­tion bonds are prefer­able to lease-rev­enue bonds.”

Wait, what?

They con­tinue, “Gen­eral oblig­a­tion bonds typ­i­cally carry an in­ter­est rate 0.2 to 0.5 per­cent­age points below the in­ter­est rate on lease-rev­enue bonds. [Gen­eral oblig­a­tion bonds is­sued by the state of Cal­i­for­nia carry an av­er­age in­ter­est rate of 5.5% and a ser­vice life of 25 years.] In ad­di­tion, lease-rev­enue bonds have slightly higher is­suance costs (due to the need to pur­chase com­mer­cial in­sur­ance) than do gen­eral oblig­a­tion bonds and re­quire a higher value of bonds to be is­sued to pro­duce the same net pro­ceeds gen­er­ated by gen­eral oblig­a­tion bonds.”

The higher risk and cost as­so­ci­ated with lease-rev­enue bonds doesn’t seem to con­cern Bank of Amer­ica, Gold­man Sachs, and Mor­gan Stan­ley – three of the largest six U.S. fi­nan­cial in­sti­tu­tions—that have un­der­writ­ten and pur­chased over $2 bil­lion in lease-rev­enue bonds for prison con­struc­tion in Cal­i­for­nia from 1991-2007. The pub­lic must be made to know that al­though fi­nan­cial in­sti­tu­tions like Bank of Amer­ica, Gold­man Sachs, and Mor­gan Stan­ley do not profit di­rectly by ex­ploit­ing prison labor or by op­er­at­ing pri­vate penal fa­cil­i­ties, they nonethe­less re­al­ize ex­or­bi­tant an­nual rev­enues by prop­ping up a “prison in­dus­trial com­plex” by way of “leas­ing through the back door.” And to para­phrase 16th cen­tury Dutch poly­math Balt­hazar Ger­bier, too many back doors make thieves.

Cal­i­for­nia res­i­dents in­ter­ested in erad­i­cat­ing the “prison in­dus­trial com­plex” and restor­ing so­cially re­spon­si­ble, sus­tain­able, and hu­mane bud­get pri­or­i­ties are en­cour­aged to join CURB (Cal­i­for­ni­ans United for a Re­spon­si­ble Bud­get). More in­for­ma­tion is avail­able athttp://​curbprisonspending.​org/​

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